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An evolutionary path towards a European Monetary Fund?

03-05-2017

There is no need for Europe to replicate the International Monetary Fund (IMF). The European Stability Mechanism (ESM) can provide the backstop for sovereigns, even without a financial contribution from the IMF. In this sense, the ESM already constitutes to a large extent a ‘European Monetary Fund’. Other IMF functions such as surveillance and policy coordination should remain with the European Commission, the Eurogroup and other existing bodies. The ESM will be called upon to act as a backstop only intermittently, in times of great financial market instability. The need for it will evolve as a function of the nature of financial markets and their cross-border integration. It is not possible to forecast with any precision when the next financial crisis might break out and what form it will take. Any evolution in the functioning of the ESM should thus aim at enhancing flexibility and clarity of its overall mandate (financial stability), rather than revising the details of the rescue mechanism (which should be extended to the Single Resolution Fund) and its modus operandi. Moreover, the ESM should be viewed as the natural instrument for unifying the euro area’s representation in the IMF.

There is no need for Europe to replicate the International Monetary Fund (IMF). The European Stability Mechanism (ESM) can provide the backstop for sovereigns, even without a financial contribution from the IMF. In this sense, the ESM already constitutes to a large extent a ‘European Monetary Fund’. Other IMF functions such as surveillance and policy coordination should remain with the European Commission, the Eurogroup and other existing bodies. The ESM will be called upon to act as a backstop only intermittently, in times of great financial market instability. The need for it will evolve as a function of the nature of financial markets and their cross-border integration. It is not possible to forecast with any precision when the next financial crisis might break out and what form it will take. Any evolution in the functioning of the ESM should thus aim at enhancing flexibility and clarity of its overall mandate (financial stability), rather than revising the details of the rescue mechanism (which should be extended to the Single Resolution Fund) and its modus operandi. Moreover, the ESM should be viewed as the natural instrument for unifying the euro area’s representation in the IMF.